Introduction
The doctrine of separate legal personality, a cornerstone of company law, establishes that a company is a distinct legal entity from its shareholders, as famously articulated in Salomon v A Salomon & Co Ltd [1897] AC 22. However, this principle can be exploited to shield individuals from liability, prompting courts to occasionally ‘pierce the corporate veil’ to hold individuals accountable. The landmark case of Prest v Petrodel Resources Ltd [2013] UKSC 34 grappled with this tension, particularly through Lord Sumption’s leading judgment, which adopted a notably restrictive approach to veil-piercing. This essay critically examines Lord Sumption’s reasoning in Prest, evaluating whether his stringent framework achieves an appropriate balance between upholding the integrity of separate legal personality and addressing abusive uses of the corporate form. The discussion first outlines the context and key aspects of the Prest decision, then analyses Lord Sumption’s restrictive principles, and finally assesses their implications for the balance between principle and fairness in company law.
Context and Overview of Prest v Petrodel
In Prest v Petrodel, the UK Supreme Court confronted a family law dispute involving the division of assets upon divorce. Mrs Prest sought to access properties held by companies controlled by Mr Prest, arguing that he had structured his assets within these corporate entities to evade financial obligations. The central issue was whether the court could pierce the corporate veil to treat the company’s assets as Mr Prest’s personal property. Lord Sumption, delivering the leading judgment, rejected a broad application of veil-piercing, insisting on its use only in exceptional circumstances where a company is used as a façade to conceal wrongdoing—specifically under what he termed ‘evasion’ rather than ‘concealment’ principles.
Significantly, Lord Sumption clarified that veil-piercing should only apply when an individual deliberately uses the corporate form to evade a pre-existing legal obligation, as opposed to merely concealing beneficial ownership. In Prest, he concluded that Mr Prest’s actions did not meet this threshold, as there was insufficient evidence of deliberate evasion. Instead, the court resolved the case by applying trust law principles, finding that the properties were held on trust for Mr Prest. This decision underscored Lord Sumption’s reluctance to undermine separate legal personality unless absolutely necessary, setting a high bar for future veil-piercing claims (Sealy and Worthington, 2013).
Lord Sumption’s Restrictive Approach to Veil-Piercing
Lord Sumption’s reasoning in Prest represents a pivotal shift towards a narrower interpretation of veil-piercing. He explicitly sought to limit judicial discretion, arguing that piercing the veil should not be a tool for expediency but rather a principled remedy for specific abuses. His distinction between ‘evasion’ and ‘concealment’ is central to this approach. Evasion, he posited, occurs when an individual uses a company to dodge an existing legal duty—such as a contractual or statutory obligation—thereby justifying veil-piercing. Concealment, conversely, refers to hiding the true ownership or control of assets, which he deemed insufficient grounds for disregarding corporate personality, as alternative legal mechanisms (e.g., trusts or agency law) can often address such issues (Sumption, 2013).
This restrictive stance aims to preserve the predictability and certainty that underpin corporate law. Lord Sumption warned against the ‘unprincipled and arbitrary’ application of veil-piercing, suggesting that frequent interference with separate legal personality risks undermining commercial confidence and the foundational principles established in Salomon. Indeed, his judgment reflects a deep concern for maintaining the integrity of the corporate form, which facilitates business by limiting personal liability and encouraging investment (Hannigan, 2018).
However, critics argue that this approach may be overly rigid. While Lord Sumption’s emphasis on legal certainty is commendable, it potentially overlooks cases where justice demands intervention, even if strict evasion criteria are not met. For instance, in family law contexts like Prest, where power imbalances and asset obfuscation are common, a stricter test for veil-piercing might allow wrongdoers to exploit the corporate form with impunity (Lowry, 2012). This tension highlights the core challenge of balancing principle with fairness, a theme explored further below.
Evaluating the Balance Between Separate Legal Personality and Preventing Misuse
Lord Sumption’s restrictive framework in Prest must be evaluated against its dual objectives: safeguarding separate legal personality while curbing misuse of the corporate structure. On one hand, his approach arguably strengthens the doctrine of separate legal personality by ensuring that veil-piercing remains an exceptional remedy rather than a routine judicial tool. By limiting its application to cases of deliberate evasion, he provides clarity for businesses and shareholders, who can rely on the distinct legal status of companies without fear of unpredictable judicial interference. This predictability is vital in commercial law, where certainty underpins transactional confiança and economic activity (Sealy and Worthington, 2013).
On the other hand, the high threshold for veil-piercing may fail to adequately address instances of corporate misuse, particularly in non-commercial contexts such as family disputes. As Hannigan (2018) notes, Lord Sumption’s focus on evasion over concealment risks leaving claimants without remedy in situations where individuals use corporate structures to obscure assets, even if not to evade a specific legal obligation. In Prest, the resolution via trust law principles was fortunate, but such alternatives may not always be available, potentially resulting in unjust outcomes. Furthermore, the restrictive approach might disproportionately affect vulnerable parties, such as spouses or creditors, who lack the resources to navigate complex alternative legal routes (Lowry, 2012).
A counterargument is that broadening veil-piercing risks eroding the Salomon principle, creating uncertainty and deterring corporate formation. Yet, a middle ground—perhaps a more flexible test considering broader notions of fairness or intent—could strike a better balance. While Lord Sumption’s framework is logically sound and legally coherent, it arguably prioritises doctrinal purity over equitable outcomes in certain contexts. Therefore, while his reasoning is a significant contribution to clarifying the law, it may not fully reconcile the competing demands of respecting corporate autonomy and preventing abuse.
Conclusion
In conclusion, Lord Sumption’s reasoning in Prest v Petrodel represents a principled attempt to restrict veil-piercing to cases of deliberate evasion, thereby reinforcing the doctrine of separate legal personality. His distinction between evasion and concealment provides a clear framework that enhances legal certainty, aligning with the foundational principles of company law. However, this restrictive approach may fall short in addressing the full spectrum of corporate misuse, particularly in contexts where alternative remedies are unavailable or impractical. While it protects commercial predictability, it risks sidelining justice in cases involving vulnerable parties or complex asset concealment. Ultimately, Lord Sumption’s approach leans heavily towards preserving separate legal personality, arguably at the expense of flexibility to prevent misuse. A more nuanced test, balancing strict criteria with broader considerations of fairness, might better serve the dual aims of company law. Future judicial and academic discourse must continue to grapple with this tension to ensure that neither corporate sanctity nor equity is unduly compromised.
References
- Hannigan, B. (2018) Company Law. 5th ed. Oxford: Oxford University Press.
- Lowry, J. (2012) Lifting the Corporate Veil: Principles, Policy and Practice. Company Lawyer, 33(1), pp. 1-10.
- Sealy, L. and Worthington, S. (2013) Sealy & Worthington’s Cases and Materials in Company Law. 10th ed. Oxford: Oxford University Press.
- Sumption, L. (2013) Prest v Petrodel Resources Ltd [2013] UKSC 34. United Kingdom Supreme Court.
